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Does Trend Following Work on Stocks?
November 2005

Over the years many commodity trading advisors, proprietary traders, and global macro hedge funds have successfully applied various trend following methods to profitably trade in global futures markets. Very little research, however, has been published regarding trend following strategies applied to stocks. Is it reasonable to assume that trend following works on futures but not stocks? We decided to put a long only trend following strategy to the test by running it against a comprehensive database of U.S. stocks that have been adjusted for corporate actions. Delisted companies were included to account for survivorship bias. Realistic transaction cost estimates (slippage & commission) were applied. Liquidity filters were used to limit hypothetical trading to only stocks that would have been liquid enough to trade, at the time of the trade. Coverage included 24,000+ securities spanning 22 years. The empirical results strongly suggest that trend following on stocks does offer a positive mathematical expectancy, an essential building block of an effective investing or trading system.
Author(s): Cole / Wilcox Eric Crittenden
Managing Partner / Director of Research & Trading
Blackstar Funds, LLC Blackstar Funds, LLC
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No. of Recommendations: 1
Interestingly enough, the guy who runs the Trend Following website lives up the street from me, and I consider him a friend. We've had some interesting debates, and I've got his new book sitting on my desk.

I think that it's indisputable that there is something to the fact that stocks have momentum. Wilcox and Crittenden failed to disprove the finding of Kyle and Wang (1998). They showed that when traders compete for duopoly profits that the conditions that are necessary to show that overconfident traders reap greater profits include several assumptions exist that do not extend to individual investors.

There's an ocean of difference between "can lead to outperformance" and "offers the highest potential for outperformance" in investing.

Or to put it more simply, if this study held that much water, there's a low probability that Odean's and Barber's research into actual trading results over extended periods of time would show such overwhelming evidence to the contrary.

Bill Mann
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